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Fraud Report from the Trenches – 4 Tips for Boards and Management

by John Cohen
Nonprofit and For-Profit companies continue to have Controllers, CFO’s, and Executive Directors departing from their organizations “under a cloud” (usually a lightning cloud).  This leads us to think one of our Best Value client services is our Internal Control Review of Major Accounting Policies, Procedures, and Controls.  With just a few days work, we provide Senior Managements and Boards of Directors with an independent third party evaluation of their entity’s accounting efficiency, effectiveness, and exposure.

That having been said, here are a few tips which we haven’t seen published before but which Boards of Directors and Senior Managements can use to avoid a lightning strike.  And remember, even the smallest organization with one bookkeeper can have good internal control.

  1. Learn to read your organization’s Balance Sheet and Income Statement.  It’s not rocket science.  Have the Controller/CFO walk you through the line items one at a time for a couple of quarters and you’ll add both a new personal skill and an important element of control to the organization.  We recently worked at an organization where the CEO and Board of Directors had not seen a balance sheet in three years (believe it or not).
  2. For organizations which have an annual audit, the Board of Directors should advise the CPA firm that the Board will expect an in-depth discussion on internal control and other recommendations.  Virtually all of the organizations which make newspaper headlines have “clean” audit opinions and virtually no criticisms during their audits.
  3. For organizations not required to have an annual audit, engage a reputable CPA firm to prepare “reviewed” financial statements annually.  Although a “review” does not require the CPA firm to obtain a significant insight into your accounting function, it can be an important “pair of eyes” which may see something amiss.  Before engaging the CPA firm, tell them that you expect at least an informal discussion of your internal controls after the engagement is over.  In one of the largest frauds we worked on, the organization used its CPA to prepare tax returns (only), while relying exclusively on its CFO/Controller for financial statements.
  4. Ask yourself one question:  Does anyone have the authority to initiate, approve, and consummate a transaction without anyone else participating/knowing?  If the answer is “yes”, you are at risk and have a deficiency which should be addressed sooner rather than later.  Unless collusion is involved, virtually every fraud includes this characteristic.

NPA Consultants are specialists in Policies, Procedures, Internal Controls and Financial Reporting.  We help accounting departments run “better, faster, cheaper,” and Boards of Directors/senior managements insure that they are performing their fiduciary duties at the highest possible level.  We are happy to answer any questions.  Contact us at info@NPAccountants.org or 617 694 4600.

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